Kernel reports record-high net income in FY2016

Ukraine’s leading sunflower oil producer Kernel (KER PW) reported its record-high net income of USD 225 mln (more than doubled yoy) in FY2016 ended in June as part of its annual results released on Oct. 24. The result exceeded our forecast of USD 201 mln and Bloomberg consensus of USD 212 mln. Revenue declined 14.6% yoy to USD 1,990 mln (from USD 2,330 mln), while EBITDA slid 12.7% to USD 346 mln, which was 5% above our expectations, but in line with the consensus.

FY2016 CapEx rose to USD 60.7 mln from USD 24.3 a year ago, but the company also managed to reduce its net debt to USD 283 mln from USD 339 mln, which resulted in the further deleveraging with its net debt/EBITDA ratio at 0.8x.

Kernel provided guidance of crushing volumes increasing 7.4% yoy to 2.9 mmt in FY2017, which should be fueled by a 30% yoy increase in crushing capacities as a result of the acquisition of an oilseed facility in FY2016, the operations expansion of a top crushing plant and a signed tolling agreement.

The company also issued its 1QFY17 trading update, reporting that its oilseed crush declined 33% yoy to 280 kt, which the company attributed to the lower availability of sunflower seeds in the end of the marketing season. Bulk sunflower oil sales increased 5.8% yoy to 167 kt. Grain sales surged 27.5% yoy to 1.183 mmt and export terminal throughput grew 19.3% yoy to 1.393 mmt due to strong crop production and higher carried-over stocks.

Igor Zholonkivskyi: Kernel has delivered solid financial results, despite the company’s FY2016 crushing margins falling, owing to supply/demand imbalances of sunflower seed. We view as a positive sign that the company continues to deleverage while generating solid cash flows, which allows it to conduct all the planned investments across all the business lines. The 2016/2017 season should be favorable to the company’s operations as the 2016 sunflower seed harvesting acreage increased 16% yoy, which should result in a record sunflower seed harvest.

As the existing supply imbalance in sunflower seed is expected to correct itself throughout FY2017, we expect the margins in this business segment to improve. The performance of the company’s other business segments is likely to slightly improve or at least remain stable in the next year, which overall should enable the company to deliver solid financial results in FY2017. We confirm our bullish view on Kernel stock.